This invention relates generally to the identification, investigation, assessment and management of legal, regulatory and reputational risks (“Risks”). In particular, the present invention relates to a computerized system and method for structuring risk management models designed to assist a financial institution quantify financial, legal, regulatory and reputational risk associated with opening accounts related to management of financial assets and investments.
Bank and non-bank financial institutions, including: investment banks; merchant banks; commercial banks; securities firms, including broker dealers securities and commodities trading firms; asset management companies, hedge funds, mutual funds, credit rating funds, securities exchanges and bourses, institutional and individual investors, law firms, accounting firms, auditing firms and other entities, hereinafter collectively referred to as “financial institutions,” typically have few resources available to them to assist in the identification of present or potential risks associated with opening a particular investment or trading account. Risk can be multifaceted and far reaching. Generally, personnel interfacing with a client have minimal understanding of the issues involved relating to risk. Nor do the personnel have available a mechanism to provide real time assistance to assess a risk factor or otherwise qualitatively manage risk. In the event of investment problems, it is often difficult to quantify to regulatory bodies, shareholders, newspapers and other interested parties, the diligence exercised by the financial institution to properly identify and respond to risk factors. Absent a means to quantify good business practices and diligent efforts to contain risk, a financial institution may appear to be negligent in some respect.
Risk associated with opening an investment account can include factors associated with financial risk, legal risk, regulatory risk, credit risk and reputational risk. Financial risk can include factors indicative of monetary costs that the financial institution may be exposed to as a result of opening a particular account and/or transacting business with a particular client. Monetary costs can be related to fines, forfeitures, cost to defend an adverse position, or other related potential sources of expense. Credit risk relates to factors that can adversely affect a party's ability to borrow money. Regulatory risk can include factors that may cause the financial institution to be in violation of rules put forth by a regulatory agency such as the Securities and Exchange Commission (SEC), Federal Reserve Board, a stock exchange or international counterparts. Regulatory risk can be particularly important in light of ongoing increased scrutiny of business practices which can result in managerial distraction and loss of management time. Reputational risk relates to harm that a financial institution may suffer regarding its professional standing in the industry.
A financial institution can suffer from being associated with a situation that may be interpreted as contrary to an image of honest and forthright corporate governance. Detrimental effects can include a significant loss of business and client confidence.
What is needed is a method and system to assist in due diligence relating to opening accounts involved in financial transactions. A new method and system should anticipate offering guidance to personnel who interact with clients and also be situated to convey information relating to risk to a compliance department, and assist in prioritization and/or evaluation of how serious or important a situation may be. It should be able to demonstrate to regulators that a financial institution has met standards relating to risk containment.